Fundamental financial accounting concepts 10th edition edmonds solutions manual

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SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 6 EXERCISE 6-1A a.

Section 404 of Sarbanes-Oxley requires a statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting by public companies. The framework established by The Committee of Sponsoring Organizations for the Treadway commission (COSO) in 1992 and is currently in the process of being updated.

b.

These rules apply to entities subject to filings with the SEC (“issuers”) such as corporations and certain types of partnerships that issue publicly-traded securities.

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EXERCISE 6-2A 1.

Segregation of Duties: Whenever possible, the functions of authorization, recording, and custody should be handled by different individuals. If these duties are separated, the likelihood of theft or fraud by employees is greatly reduced, because collusion among employees would be necessary to accomplish the crime.

2.

Quality of Employees: Employees should be competent and adequately trained to perform the required task.

3.

Bonded Employees: Employers should hire employees with high personal integrity. Employees in positions of trust should be covered with a fidelity bond (insurance against loss from employee dishonesty).

4.

Periods of Absence: Employees should be required to take extended vacations and/or be rotated among duties in order to discover patterns of dishonesty or theft.

5.

Procedures Manual: A procedures manual should be established, kept up-to-date, and enforced to assure that company procedures for processing transactions are being followed.

6.

Authority and Responsibility: A clear chain of command should be established and documented. A manual should detail this chain of command and provide guidance for specific and general authority.

7.

Prenumbered Documents: The use of prenumbered documents (checks, receipts, etc.) requires all such documents to be accounted for and reduces the likelihood of unauthorized transactions.

8.

Physical Control: All assets should be properly documented, and periodically accounted for, with access limited to authorized personnel.

9.

Performance Evaluations: A periodic and independent evaluation of employees' performance alerts management to inefficiencies of employees.

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EXERCISE 6-3A Segregation of duties would have eliminated this problem. Chun should not have had the authority to evaluate returns (authorization) and to dispose of the defective merchandise (custody). If these two duties had been performed by separate individuals, it would have been difficult to commit this type of crime.

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EXERCISE 6-4A By checking Mr. Clark’s references, educational background, etc., and bonding its physicians, RMC could have avoided this loss. A proper background check, including researching Clark having a valid medical license to practice as a physician, would have revealed Mr. Clark’s fraudulent qualifications and he would not have been hired.

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EXERCISE 6-5A a.

If you are a small business with only two employees, you still need to implement all of the basic procedures that are possible. You need to be especially careful about quality of employees, bonded employees where cash or other easily transferable assets are involved, physical controls (e.g. insurance, locks, on premises safe), prenumbered documents, periods of absence where possible, and segregation of duties where possible.

b.

In a small business, the segregation-of-duties control requirement is addressed by involvement of the owner. The owner needs to take a more aggressive role in the management and oversight of the business, especially the handling of cash. The owner should be sure he/she signs and verifies the validity of each check and oversees the cash receipts and deposits. In addition, the owner should receive the bank statement and review it each month.

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EXERCISE 6-6A a.

Cash requires additional control procedures because of its appeal.

Usually possession of cash is presumed ownership. It usually cannot be traced and one dollar cannot be distinguished from another. Relatively small amounts of high-denomination currency can represent significant amounts of value. Consequently, extra controls are necessary to safeguard cash.

b.

Cash includes currency and other items that are payable on demand such as checks, money orders, bank drafts, and certain savings accounts. Some companies combine certain investments with cash for balance sheet presentation. Such securities would be called “cash equivalents” and their defining requirements would be disclosed in the notes to the financial statements.

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EXERCISE 6-7A a. & c.

Han’s Supplies Statements Model Assets = Liab. + S. Equity Cash + Acct. Rec. (a) (270) + 270 = NA + NA (c) 290 + (270) = NA + 20

Rev. − Exp. = Net Inc.

Cash Flow

NA − 20 −

(270) OA 290 OA

NA NA

= =

NA 20

b.

Asset exchange.

c.

See financial statements model above. The $20 fee is miscellaneous income.

d.

Asset Exchange is $270 and Asset Source is $20.

e.

Event a. c.

Account Titles

Debit

Accounts Receivable Cash

270

Cash

290 Accounts Receivable Miscellaneous Income

Credit 270 270 20

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EXERCISE 6-8A

Reconciling Items Credit Memo Interest Revenue Deposits in Transit Debit Memo Service Charge Charge for Printing New Checks NSF Check from Customer Note Receivable Collected by the Bank Outstanding Checks

Book Balance Adjusted?

Yes Yes No Yes Yes Yes Yes Yes No

Added or Subtracted? + + NA − − − − + NA

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EXERCISE 6-9A

Reconciling Items Bank Service Charge Outstanding Checks Deposits in Transit Debit Memo Credit Memo Certified Checks Petty Cash Voucher NSF Check from Customer Interest Revenue

Bank Balance Adjusted?

No Yes Yes No No No No No No

Added or Subtracted?

NA − + NA NA NA NA NA NA

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EXERCISE 6-10A a.

Bank Reconciliation Unadjusted Bank Balance 6/30/Year 1 Add: Deposit in Transit Less: Outstanding Check True Cash Balance 6/30/Year 1

$19,500 2,400 (6,690) $15,210

Unadjusted Book Balance 6/30/Year 1 Add: Credit Memo for Interest Earned Less: Debit Memo for Service Charge True Cash Balance 6/30/Year 1

$15,200 30 (20) $15,210

b.

Date Adj 1 Adj 2

Account Titles

Debit

Cash Interest Revenue

30

Bank Service Charge Expense Cash

20

Credit 30 20

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EXERCISE 6-11A Unadjusted Bank Balance, 6/30 Plus: Deposits in Transit Less: Outstanding Check True Cash Balance, 6/30

81,500 3,1502,350 (5,611) (5,611) $79,039

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EXERCISE 6-12A Unadjusted Book Balance, 5/31 Add: Interest Earned Note Collected by Bank Less: NSF Check Service Charges True Cash Balance, 5/31

$7,750 $ 13 800 72 50

813

(122) $8,441

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EXERCISE 6-13A a.

Asset exchange.

b.

Chen Company Statements Model Assets = Liab. + S. Equity Petty Cash + Cash (200) + 200 = NA + NA

Rev. − Exp. = Net Inc.

NA

−

NA =

Cash Flow

NA

NA

c.

Chen Company General Journal Date Jan. 1

Account Titles Petty Cash Cash

Debit

Credit

200 200

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EXERCISE 6-14A a.

Fresh Foods Statements Model Assets

=

S. Equity Petty Ret. Cash = Earn.

Rev. −

Exp.

= Net Inc.

Cash Flow

No Cash .

1. (100.00)

+

+ 100.00 =

NA

NA −

NA

=

NA

NA

2.

NA

+

NA

=

NA

NA −

NA

=

NA

NA

3.

(90.80)*

+

NA

= (90.80)

NA − 90.80 = (90.80)

(90.80) OA

*$100.00 − $9.20 = $90.80

b.

Fresh Foods General Journal Entries Event No. 1.

Account Titles Petty Cash Cash

2.

No Entries

3.

Maintenance Expense Office Supplies Expense Transportation Expense Cash Short and Over Cash

Debit

Credit

100.00 100.00

61.50 12.50 15.00 1.80 90.80

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EXERCISE 6-15A a.

No effect; this is an asset exchange transaction.

b.

Net charge to expense is $197.80; expenses will be debited for $196.50 the amount of the vouchers; cash short and over will be credited for $1.30.

c.

Replenishment.

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EXERCISE 6-16A The memo should explain that her confidentiality requirements prohibit an auditor from discussing the matter with any outside parties except when asked in a court of law or by a professional investigative body.

There is no accountant/client privilege that covers acts of fraud or other illegal acts.

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SOLUTIONS TO PROBLEMS - SERIES A - CHAPTER 6 PROBLEM 6-17A a.

Segregation of duties would help to prevent this type of theft. The functions of authorization, recording, and custody should be handled by different individuals. Trap should not be authorizing reimbursements, recording the transactions, and having custody of the funds. The accounts payable clerk should check for proper authorization on petty cash vouchers. Also, if Trap had been required to take an extended vacation, the fraud may have been detected in her absence.

b.

A background check would have revealed Clampet’s falsification of his resume.

c.

Physical control. Keep office supplies in a locked closet. Assign an employee to be responsible for custody and disbursement of the office supplies. Different individuals should periodically take inventory and reconcile the count to the inventory account.

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PROBLEM 6-18A a.

Hall’s Cards Bank Reconciliation August 31, Year 1 Unadjusted Bank Balance, August 31, Year 1 Add: Deposit in Transit Less: Outstanding Checks True Cash Balance, August 31, Year 1

$16,140 4,150 ( 5,370) $14,920

Unadjusted Book Balance, August 31, Year 1 Add: Error in recording check for inventory Less: Debit Memo for new checks True Cash Balance, August 31, Year 1

$14,100 900 (80) $14,920

b.

General Journal Ref. 1.

2.

Account Titles

Debit

Cash Inventory

900

Office Supplies Expense Cash

80

Credit 900 80

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PROBLEM 6-19A Pro Beauty Supply Inc. Bank Reconciliation May 31, Year 1 Unadjusted Bank Balance, May 31, Year 1 Add: Deposits in Transit Bank Error Less: Outstanding Checks

#3013 3054 3056

$9,150 $1,510 560

2,070

510 640 1,520

(2,670)

True Cash Balance, May 31, Year 1

$8,550

Unadjusted Book Balance, May 31, Year 1 Add: Note Collected by Bank

$8,510*

Less: Collection Fee Bank Service Charge NSF Checks Error in recording payment for utilities True Cash Balance, May 31, Year 1

$ 500

500

20 40 310 90

(460) $8,550

*Unadjusted cash balance per Pro Beauty Supply’s books is computed as: x + $500 − $460 = $8,550; x = $8,510.

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PROBLEM 6-20A Wong Company General Journal January 31, Year 1 Event a.

Account Titles Bank Service Charge Expense Cash

b.

No Entry

c.

Accounts Receivable Cash

Debit 50

50

62 62

d.

No Entry

e.

No Entry

f.

Office Supplies Cash

18

Cash

450

g.

Notes Receivable h.

Credit

18 450

No Entry

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PROBLEM 6-21A a.

Park Valley Spa Bank Reconciliation July 31, Year 1 Unadjusted Bank Balance, July 31, Year 1 Add: Deposit in Transit Less: Outstanding Checks #2353 2356

$14,929 3,550 $1,500 745

(2,245)

True Cash Balance, July 31, Year 1

$16,234

Unadjusted Book Balance, July 31, Year 1 Add: Credit Memo for Collection of Notes Receivable Less: Debit Memo for Printed Checks

$13,200

True Cash Balance, July 31, Year 1

$16,234

3,050 (16)

b.

Account Titles Cash Notes Receivable Office Supplies Expense Cash

Debit

Credit

3,050 3,050 16 16

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PROBLEM 6-22A Assets Event Numbe r

= Liabilities

Type of Event

+

Stockholders’ Equity Common Retained Stock + Earnings

1.

AS

+

NA

NA

+

2.

AE

+−

NA

NA

NA

3.

AS

+

NA

NA

+

4.

AU

−

NA

NA

−

5.

AE

+−

NA

NA

NA

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PROBLEM 6-23A a.

Account Title

Debit

Accounts Receivable Cash

1,800

Credit 1,800

b.

The clerk has collected cash from a customer on account. This required a book entry debiting cash and crediting accounts receivable. Instead of depositing the money, the clerk kept the money. Now the cash balance per books is higher than the cash balance per bank. The clerk hides the discrepancy by deducting a fictitious NSF check from the book balance.

c.

Segregation of Duties. Do not allow the same person to record transactions, reconcile bank statements, record adjusting entries and have custody of the money.

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PROBLEM 6-24A a.

Austin Co. General Journal Event 1.

Account Titles Petty Cash Cash

Debit

Credit

300 300

2.

No Entry

3.

Postage Expense Miscellaneous Expense Meals Expense Transportation Expense Maintenance Expense Cash Short and Over Cash*

62 20 70 50 75 2 279

*$300 − $21 = $279

b. The cash short is an insignificant amount and will be reported on the income statement as miscellaneous expense of $2. c.

Event Number

Type of Event

1.

AE

2.

No Effect

3.

AU

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PROBLEM 6-24A (cont.) d.

Effect of Events on the Financial Statements No.

= Liab. + Stk. Equity Assets + Petty Cash = + Ret. Ear. Cash

1.

2.

3.

(300) NA (279)

+ + +

300 NA NA

= = =

NA NA NA

+ + +

NA NA (279)

Rev. −

Exp.

=

Net Inc.

NA − NA − NA −

NA NA 279

=

NA NA (279)

= =

Cash Flows

(279)

NA NA OA

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PROBLEM 6-25A The memo should contain some of the following points: 1.

2.

3.

4.

5.

Neither the CPA firm, a CPA of the firm, nor family members of the CPA can have any ownership interest in the company it is auditing.

The CPA is not an employee of the firm that he/she is auditing.

Payment of the audit fee cannot be based upon the outcome of the audit.

The CPA’s primary responsibility is to the public and not to the company being audited.

The CPA has a legal responsibility to members of the public who have an interest in the firm being audited. Protection of the public is maintained whereby CPAs issuing substandard audit reports can be disciplined by the state in which the CPA is licensed.

6-32